Marketing Channel: Supply

Chain Management
Chapter 12
 Issues Concerning Distribution
Channels

What is the Nature What Problems do

Of Distribution Companies Face in
Channels? Designing and
Managing Their
Channels?

How do Channel
Firms Interact and
Organize to do the
Work of the
Channel?
 What is a Distribution Channel?

 A set of interdependent organizations (intermediaries)

involved in the process of making a product or service
available for use or consumption by the consumer or
business user.
 A strong distribution system can be a competitive advantage
 Channel decisions involve long-term commitments to other
firms
 Value Delivery Network

 Value delivery network is made up of the company,

suppliers, distributors, and ultimately customers who
partner with each other to improve the performance
of the entire system.
 Supply Chains and the Value Delivery Network

Supply chain Partners

Upstream partners include raw material suppliers,
components, parts, information, finances, and expertise
to create a product or service.

Downstream partners include the marketing channels or

distribution channels that look toward the customer.

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 Supply Chains and the Value Delivery Network

Supply chain “make and sell” view includes the firm’s raw
materials, productive inputs, and factory capacity.

Demand chain “sense and respond” view suggests that

planning starts with the needs of the target customer, and the
firm responds to these needs by organizing a chain of
resources and activities with the goal of creating customer
value.

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 The Nature and Importance of Marketing
Channels

How Channel Members Add Value

Information Promotion Contact

Physical
Matching Negotiation
distribution

Financing Risk taking

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 The Nature and Importance of Marketing
Channels

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Channel Behavior and Organization

 Conventional distribution channel consists of one or

more independent producers, wholesalers, and
retailers. Each seeks to maximize its own profits, and
there is little control over the other members and no
formal means for assigning roles and resolving
conflict.
 Marketing channel consists of firms that have
partnered for their common good with each member
playing a specialized role.
 Channel Behavior and Organization

Vertical Marketing Systems

Vertical marketing systems (VMSs) provide channel
leadership and consist of producers, wholesalers, and
retailers acting as a unified system.
We look at 3 types of VMSs:
1. Corporate marketing systems
2. Contractual marketing systems
3. Administered marketing systems

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 Channel Behavior and Organization

Corporate vertical marketing system integrates successive

stages of production and distribution under single ownership.

Zara; It has control over almost every aspect of the supply

chain, from design and production to its own worldwide
distribution network. It makes 40 percent of its own fabrics
and produces more than half of its own clothes, rather than
relying on a hodgepodge of slow-moving suppliers.

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 Channel Behavior and Organization

Contractual vertical marketing system consists of

independent firms at different levels of production and
distribution who join together through contracts to obtain
more economies or sales impact than each could achieve
alone. The most common form is the franchise organization.

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 Channel Behavior and Organization

Administered vertical marketing system has a few dominant

channel members without common ownership. Leadership
comes from size and power.

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 Channel Behavior and Organization

Horizontal Marketing System

Horizontal marketing systems are when two or more
companies at one level join together to follow a new
marketing opportunity.

Companies combine financial, production, or marketing

resources to accomplish more than any one company could
alone.

Ch 14 - 14 Copyright © 2011 Pearson Education

 Channel Behavior and Organization

Multichannel Distribution Systems

Multichannel Distribution systems (Hybrid marketing

channels) are when a single firm sets up two or more
marketing channels to reach one or more customer
segments.

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 Channel Behavior and Organization

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Channel Behavior and Organization
 Channel Conflict
 Occurs when channel members disagree on roles, activities,
or rewards. Who should do what and for what rewards?
 Types of Conflict:
 Horizontal conflict: occurs among firms at the
same channel level e.g: Dealers’ conflict, or retailer to retailer
 Vertical conflict: occurs among firms at different channel levels e.g.
Conflict between parent company and re-sellers.
 For the channel to perform well, each channel
member’s role must be specified and conflict must be
managed.
 Channel Behavior and Organization

Changing Channel Organization

Disintermediation occurs when product or service producers

cut out intermediaries and go directly to final buyers, or
when radically new types of channel intermediaries displace
traditional ones.

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 Channel Design Decisions

Analyzing Consumer Service Needs

Setting Channel Objectives & Constraints

Identifying Major Alternatives

Intensive Selective Exclusive

Distribution Distribution Distribution

Evaluating the Major Alternatives

 Channel Design Decisions
 Step 1: Analyzing Consumer Needs
 Cost and feasibility of meeting needs must be considered
 Do consumers want to buy from nearby locations?
 Do they want add-on services?
 Would they buy in person or over phone or via the
Internet?
 Channel Design Decisions
 Step 2: Setting Channel Objectives
 Set channel objectives in terms of targeted level of
customer service
 Many factors influence channel objectives
 Nature of the company: size and financial situation
 Its products: perishable (direct selling to avoid more
handling) or durable (more channel can be used)
 Its competitors: avoid channels used by competitors. E.g.
Avon
 Economic conditions: depressed economy –shorter
channel used in a economic way
 Channel Design Decisions
 Step 3: Identifying Major Alternatives
 Types of intermediaries
 Company sales force, distributors, wholesalers, retailers
 Number of marketing intermediaries
 Intensive, selective, and exclusive distribution
 Responsibilities of channel members: Agree on price
policies, territorial rights, ad specific services to be
performed by each party.
Number of marketing intermediaries
 Intensive
 Stocking the product in as many
outlets as possible
 Used for Convenience Goods Even found sold in a boat floating
down a deserted section of the Nile
 Selective River, says one Globe and Mail
 Using more than one but fewer reporter
than all of the intermediaries
who are willing to carry the
company's products
 Used for Shopping Goods
In some selected places. We may
 Exclusive not find a GE appliance in a small
 Giving a limited number of department store
dealers the exclusive right to
distribute the company's
products in their territories
 Used for Specialty Goods

We can’t buy a rolls Royce or a

ferrari just from anywhere
 The Nature and Importance of Marketing Channels

Number of Channel Levels

Connected by types of flows:
1. Physical flow of products
2. Flow of ownership
3. Payment flow
4. Information flow
5. Promotion flow

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 Channel Design Decisions

 Step 4: Evaluating Major Alternatives

 Economic criteria: compare the likely sales, costs
and profitability of different channel alternatives.
 Control issues: how much control to be given over
the marketing of the product.
 Adaptive criteria: flexibility of channel members to
adapt with environmental changes.
Channel Management Decisions

Selecting Channel Members

FEEDBACK
Motivating Channel Members

Evaluating Channel Members

Channel Management Decisions
 Selecting Channel Members
 Identify characteristics (years in business, other lines carried,
growth and profit record, cooperativeness and reputation) that
distinguish the best channel members
 Managing and Motivating Channel Members
 Partner relationship management (PRM) is key
 Evaluating Channel Members
 Performance should be checked against standards (sales quotas,
average inventory levels, customer delivery time, treatment of
damaged and lost goods, cooperation in company promotion, and
training programs, and services to the customer.
 Channel members should be rewarded or replaced as dictated by
performance
 Marketing Logistics and Supply Chain
Management

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 Major Store Retailer Types

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